With the Supreme Court upholding the Insolvency and Bankruptcy Code (IBC) in its entirety, the resolution process will move faster now. SC emphasised that a person “who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with”. The apex court has relaxed the definition of related party so that bona fide persons, who are not involved in the business operations of the bankrupt company, are allowed to bid for the stressed asset. Had SC specified the timeline for Section 12A, which relates to pulling out or settlement of the bids, though, there may have even been greater clarity. Most of the amendments to this seminal piece of legislation have been commendable, especially the tightening of section 29A which ensures that wilful defaulters or those who have been classified as NPAs for more than a year will not be eligible to submit a resolution plan. This means bankers will now be able to recover their dues faster. The average duration for resolution for cases solved till end-December was a fairly high 313 days; in Essar Steel, which has now dragged on for more than 500 days, bankers are losing `17 crore a day. That is why SBI had decided to sell the exposure but later put off the sale after NCLAT said the Ahmedabad NCLT had to give its verdict by January 31.

Most critically, the apex court’s ruling establishes the hierarchy of creditors with bankers now right on top and operational creditors (OCs) below them; OCs were seeking a status equal to that of financial creditors and a seat on the Committee of Creditors. The judges noted that OCs had enough safeguards to protect their interests. This newspaper had earlier noted that putting home buyers at par with financial creditors, which was done by an amendment, could delay and hurt the process. However, allowing promoters of smaller businesses to bid for their companies was a good idea since, without this, many of these assets would have been sold as scrap.

While Friday’s ruling suggests the SC would not derail the IBC process by exempting power producers from the provisions of RBI’s February 12-circular, the court will pronounce a verdict on February 4. The circular mandates that even a one-day default in servicing any account of `2,000 crore or more would warrant a resolution plan within three months, else insolvency proceedings must be initiated. Given how lenders have been so lenient with borrowers in the past, it is important they be disciplined; there is no case for any exemption to any sector or class of borrowers. Lowering the voting threshold for creditors to 66%, from 75%, is another pragmatic move which will prevent a handful of lenders from disrupting the process and pushing the company towards liquidation. Given the differences in opinions between NCLT benches, the law has also clarified that late bids will not be entertained.

While the IBC process has proven to be far more effective than the SARFAESI or DRT, sadly, more than half the cases till end-December 2018 have been resolved via liquidation which means banks would have recovered very little. Also, the haircuts have been very steep and banks have managed to recover 52% of the admitted claims in less than 15% of the cases. In all, between Q3FY18 and Q3FY19, they have managed to recover a net `66,000 crore, though this number should go up sharply once the Essar Steel case is resolved. As RF Nariman and Navin Sinha observed, the defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.

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